Given the current euro zone crisis, Russia’s dependence on the European energy market is not ideal for the Russian economy. In 2012, EU-Russia trade accounted for $410.3 billion, 49 percent of Russia’s foreign trade turnover.
In the same period, Russia-China trade was worth $87.5 billion. Trade between Russia and all APEC countries excluding the US came to $182 billion.
However, Russian trade with China is growing fast. In 2000, Russia-China trade amounted to just $8 billion, while trade with the EU-27 came to around
$90 billion.
Trade with China will continue to grow faster than trade with the EU, because Russia exports natural resources for foreign industry and imports foreign industrial products. Mass industrial production is concentrated in Asia, whereas Europe specialises in the service sector and R&D, and carries out production only in high-tech industries.
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The EU is trying to improve its energy efficiency, to expand renewable energy production, and to diversify its import sources for natural resources. Europe plans to bring the share of renewable energy in its energy mix to 55 percent by 2050, and is working on shale gas projects to reduce its dependence on external energy sources. Energy-intensive industries are unlikely to see much growth in the region. Therefore, the EU is no longer a very promising market for Russia.
China, by contrast, is going through a process of rapid urbanisation that will continue for a long time. The urban population has only recently reached 50 percent of China’s total population, a low urban penetration for a developed economy. The adverse effects of China’s one-child policy and the rising cost of Chinese labour will eventually cause low-tech production to relocate to other countries. But industry will remain the mainstay of the Chinese economy.
Rapid growth in Chinese resource consumption will continue for decades.
China imports about 57 percent of its oil, and it is also importing chemicals, timber, and coal. In the long term, soil degradation and urbanisation will raise Chinese demand for agricultural products. Coal-fired power plants, which currently produce 70 percent of China’s electricity, will have serious consequences for the environment and will cause chronic congestion in China’s transport infrastructure. Opportunities for exploiting existing shale gas reserves may be limited due to lack of land and water resources in eastern China. Demand for gas imports may turn out to be practically unlimited.
China has both economic and strategic reasons for wanting to increase its import of Russian natural resources. It wants to reduce its energy dependence on the Middle East and escape the bottlenecks of sea lanes such as the Straits of Malacca. Chinese investments in Africa, the Middle East, and Latin America face serious political risk. For example, Chinese companies had contracts in Libya worth $18.8 billion and suffered direct losses of $16.6 billion as a result of the overthrow of Muammar Gaddafi’s regime. In contrast, alongside its geographical proximity and its safe, land-based transport corridors, Russia has the advantage as an energy supplier of being relatively immune to US pressure.
Russia’s main problems in implementing its pivot to the East are the absence of infrastructure in the Russian Far East and the concern that China will monopolise Russia’s economic relations in Asia. Russia is carrying out large-scale investment in infrastructure in the Russian Far East and creating special state structures to develop the region. However, implementation is constrained 96
by factors including a lack of manpower and the generally inefficient use of government funding in this kind of project. Nevertheless, the Russian state has previously managed to complete such projects, albeit with substantial costs and delays.
To avoid a Chinese monopoly over Russian economic interests, Russia has intensified its efforts to develop partnerships and increase trade with countries such as Japan, South Korea, and Vietnam. Trade with Japan in 2012 was worth just $31.2 billion, trade with South Korea came to only $24.9 billion, and trade with Vietnam amounted to just $3.6 billion. Russian trade with India is also modest, at $11 billion in 2012. But the development of economic ties is complicated by shortcomings in the Russian investment climate, lack of mutual understanding, and, in the case of Japan, unresolved territorial disputes. The need to find an economic counterweight to China should push Russia towards closer co-operation with the US in Asia. However, chronic conflicts between the two countries elsewhere make closer ties impossible.
The Russian economy’s turn to the East is irreversible. The argument that Russia will become just a “resources supplier” to Asian countries is a poor one. Throughout its history, Russia has mostly been an exporter of natural resources. Soviet industrialisation did not create modern and competitive industries, except in arms production and some defence industries. The creation of effective civilian industry will take several generations, during which the country will have to rely on revenues from natural resource exports.
And having two large markets for natural resources is better than having just the European one.
Even before the Ukraine crisis, it was clear that, in the twenty-first century, Asia would be the main driver of the global economy and the main stage for world politics. Each country’s place in the world will be decided by its economic, political, and military influence in East Asia. At the moment, Russia is gradually transferring its economic and military development to the East. In the more distant future, the pivot may lead to a shift in Russian geo-economic strategy and a decline in Russian interest in the European problems that provide the main cause of friction with NATO, the EU, and the US. Thus, the Russian pivot to Asia may eventually have positive consequences for Russia-EU relations.
However, any such result is right now a very long way off.
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